Hunting for value in China not safe

Beware the current clampdown from the Chinese government

Drew Voros

a group of stars in the sky

If you really want to catch rainbow trout in Lake Tahoe’s Truckee or Carson rivers during the spring snowpack runoff, you are advised to drop fly away from the pooling waters, according to my local sources.

“Go to the steady current shallows with pebbles, not the pools…the good ones are swimming upriver, that is where rainbows roll.”

There is no rainbow trout in China capital markets right now. It is dire. There is no natural river current, just a current clampdown. To invest in China is fuelling the clampdown. It is not good for investor assets.

Be careful where you fish

Chinese stocks and the relative ETFs are the obvious deep-value pools that look ripe. I would not fish in that China pool with a 10-foot pole.

China is the heavy hand clamping down on its capital markets. There is currently zero bottom-fishing value in China’s pivot to totalitarianism.

According to Market Insider, “China intends to ban US stock listings for tech companies with vast troves of sensitive user data”.

Others see differently

Without a doubt, Cathie Wood is an ETF superhero. She will go down in ETF history.

Her firm ARK Investment Management is dropping bait in that high-risk pool

As ETF.com reported: “An analysis of ARK’s trade notifications since last Thursday shows the firm has bought a net 1.17 million shares of JD.com and its JD Logistics subsidiary, along with about 235,000 shares of Tencent and 85,824 shares in farmer-to-consumer firm Pinduoduo.”

The majority of those shares were placed into the ARK Space Exploration & Innovation ETF (ARKX) and the ARK Fintech Innovation ETF (ARKF) while JD.com was lifted to the eighth largest holding in the ARK Autonomous Technology & Robotics ETF (ARKQ). 

Working for the clampdown

But with China’s government tightening restrictions around thriving companies, you can expect your fishing line to be cut. Private tutoring today, tobacco, alcohol and internet service provider companies tomorrow.

There are no reasonable sector plays here.

China equities are both the biggest uncertainty and opportunity to come along in a long time; buckle up. It is time for active managers to step up. As usual, Cathie Wood is a step ahead of Wall Street but this could be a big misstep.

Personally, I am not buying into that regime.

KWEB spins curious snapshot

ARK Invest is not the only boat bottom-fishing rough China Seas. Take a look at the KraneShares CSI China Internet UCITS ETF (KWEB) and its $6.7bn US counterpart, the KraneShares CSI China Internet ETF. On the surface again, it looks like bottom fishing. But it is more than that. Sharks are swimming in that pool, looking for hedging opportunities.

Despite a crushing decline in prices for KWEB over the past six months, investors have continued to pile into the ETF. According to data from ETFLogic, KWEB in Europe has seen $61.7m inflows while in the US the mirror strategy has seen $3.4bn in six months.

Chart 1: Year-to-date returns for KWEB and the iShares Core MSCI EM IMI UCITS ETF (EIMI), as at 27 August

?UMBRACO_MACRO macroAlias="InsertLightboxPopupImage" imageLightbox="umb://media/e619f3e082354c1f8d1fca8dda420d50" imageName="EIMI and KWEB YTD returns" /

Source: ETFLogic

There is also the possibility investors may be using KWEB for more complicated strategies that involve pair trades; for instance, going short a specific Chinese internet stock and buying the ETF as a hedge.

A new rodeo

If someone tells you, “This is nothing new; just another Chinese rodeo,” they are correct. China changes on a dime like a bucking bronco. With China, you should take a very long-term view: Think 2050, not 2025.

More than five years ago, China dove into capital markets and saw what efficient market pricing does. The government quickly reversed course.

As ETF.com reported in 2016: “On Thursday, authorities suspended those circuit breakers after conceding that they may be doing more harm than good by driving investors into a panic.

China tech ETF collapse: Rare opportunity or reminder of ever-present risk?

“The flip-flop only added to the sentiment that the Chinese government does not know what it is doing.”

Voting is the best protest. A close second is where you put your money. You do not have to invest in China, and in my opinion, you should not. This is a chance to vote with your money.

Drew Voros is editor-in-chief at ETF.com

This story was originally published on ETF.com

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